Asia needs pension reform: report

Written by Sanjay Jog | Mumbai | Updated: Jan 10 2009, 03:33am hrs
A number of Asian countries will need to reform their pension systems in order to deliver sustainable and adequate retirement incomes for todays workers, according to a new OECD/World Bank report. Asia needs to face up to its pension problems and needs to do so soon, says the report, which was released on January 7.

Early retirement ages and relatively high pension levels threaten financial sustainability. At the same time, low coverage, early withdrawals and lump-sum payments mean that adequacy will also be a challenge. The report says that to prepare for the rapid ageing population forecast over the next two decades, it is vital to act now to avoid repeating many of the mistakes made in Europe and North America .

The report analyses the retirement income systems of 18 Asian countries, including India , Australia , China , Indonesia , Pakistan , the Philippines and Vietnam.

The report makes three key recommendations to improve pension systems: Asian countries with defined benefit schemes, based on workers final salaries should shift to calculating pension entitlements using lifetime average earnings, as most OECD countries do. This will make them more financially sustainable and fairer. Final salary plans tend to favour people whose earnings tend to rise more rapidly with age, compared to manual workers.

Besides, many countries allow people to withdraw their pension benefits before retirement or pay lump-sum benefits, rather than a regular retirement income. Allowing people to take out their savings only on retirement via regular payments, known as annuities, would reduce the risk of peoples savings, running out in retirement.

Further, countries should link pension payments to reflect changes in the cost of living. Of the countries covered, only China and the Philippines currently do so. The report also states that there is obviously a strong relationship between coverage of formal pension schemes and national income. Some countries-Sri Lanka, the Philippines and Vietnam - have a higher coverage than most countries with similar national income, per head. Others such as China , India , Pakistan and Thailand have low coverage, given their level of economic development.